The U.S. needs to overhaul its education system to encourage innovation and focus more federal funding on high-risk research to maintain a competitive edge over other nations, according to a report endorsed by leading U.S. companies and universities.

The 68-page report, "Innovate America: Thriving in a World of Challenge and Change," calls for the U.S. government to reallocate 3 percent of all federal research and development budgets toward "innovation acceleration" grants that invest in novel, high-risk and exploratory research. The report, released by the Council on Competitiveness Wednesday, also calls on the U.S. government to increase resources for patent examinations and to create new search functionality for patent databases so that inventors can better gauge whether similar inventions already exist.

The council started the 15-month National Innovation Initiative that produced the report, involving leaders of dozens of U.S. companies, labor groups and universities, because members of the council believed the U.S. needs to refocus on its historic strength of creating innovative products and ideas, said Samuel Palmisano, chairman and chief executive officer of IBM and co-chairman of the innovation initiative.

"Many of us in this room recognized that American innovation had reached a critical juncture," Palmisano said during a conference to unveil the report in Washington, D.C. "A nation that has built a progressive society and an economic juggernaut ... was somehow losing its edge at just the wrong time, when the game was becoming dramatically more competitive."

About half of all U.S. patents are owned by overseas companies, Palmisano noted. In 2002, U.S. corporate research and development declined by $8 billion, the largest drop in any year since 1950, he added. And five countries, including Japan, South Korea and Sweden, spend a larger percent of their gross domestic product on research and development (R&D) than the U.S. does, according to the report.

Innovation shouldn't just be a national priority, Palmisano said; it should be the top national priority. He defined innovation as the intersection between invention and insight.

"Innovation is the only sustainable driver for U.S. productivity growth and a high standard of living for future generations," added F. Duane Ackerman, chairman and chief executive officer of BellSouth Corp. and chairman of the Council on Competitiveness.

The report lays out 30 recommendations, including:

-- Reform U.S. immigration programs to allow more foreign science and engineering students to study and work in the U.S.

-- Build 10 "innovation hot spots" across the U.S. over the next five years and focus on public-private partnerships to build up those areas.

-- Create safe-harbor provisions that allow public companies to talk about intangible innovation-focused assets and encourage investment in those companies.

--- Use health care as a test bed for new technologies, including electronic health reports.

-- Focus on creative thinking and innovation skills through problem-based learning in all levels of education.

-- Expand assistance to workers dislocated by technology and trade.

Modern workers can change jobs or careers several times during their working lives, and the U.S. government needs to help them adjust to an ever-changing work environment, said G. Wayne Clough, president of the Georgia Institute of Technology and co-chairman of the National Innovation Initiative.

"In addition to growing new generations of innovators, we must also empower the workers of today," Clough said. "For many workers in the innovation space, the economic ground often feels like it's shifting beneath their feet, and many of them are uncertain about the future."

Palmisano, whose company has embraced open source software such as Linux, also focused on intellectual property reform. He called for a middle ground between ideas defined as someone's property and those who say all innovations should be shared freely in society. Open standards can accelerate innovation and encourage cooperation between companies, he added.

Web-based tools where customers custom-build products and consumer-based business plans from companies such as eBay Inc. encourage innovation outside the walls of companies, Palmisano said.

"None of us is as innovative as all of us," he said. "In the coming years ... we will not longer look at intellectual property to be owned but we'll think of intellectual capital."

The report encourages U.S. companies to improve their competitive posture, but also looks for how the U.S. can cooperate with other nations, Palmisano said. If the U.S. will "actively engage with the entire global community," it can reduce terrorism threats, poverty and health problems, he said.

"America's leadership doesn't mean instead of (other countries), it means we lead the world to a better place," he added.

The report is available at http://www.compete.org/pdf/NII_Final_Report.pdf.